If Metals Decline Even With Rising Stocks, What Would Happen If Stocks Declined?

This essay is based on the Premium
Update posted on January 21st, 2011

With gold prices showing no signs of a breakout in 2011 so far, many investors
have started unwinding long positions in anticipation of no further upside.
The situation warrants a close scrutiny of the state of affairs. In the following
part of this essay we analyze indications from the correlation matrix and technical
indicators from silver and mining stocks to gauge the extent of this concern.

However, first, we would like to draw your attention to the fact that the
London Bullion Market Association conducted its annual survey of leading
analysts to ask them where the price for gold will go in 2011. A total of
24 contributors gave their estimates for the high, low and average price
for 2011 for gold, silver, platinum and palladium. In 2011, Forecast contributors
predict rises for all precious metals. Their average gold forecast is US$1,457,
a 19.0% increase on the 2010 average price, similar to the forecast of $1,450
made by delegates at the 2010 LBMA Precious Metals Conference in Berlin last
September. Analysts predict that the average silver price will be $29.88,
a 48.0% rise on the 2010 average price. The average 2011 Platinum price is
forecast to rise 12.6% from the average 2010 price, to $1,813 and palladium
shows no sign of slowing down with an average 2011 price prediction of $814.65,
a 54.8% increase on last year's bumper average price.

Generally, when everyone gets bullish it's time to sell, and when everyone
is bearish it's time to buy, so perhaps the situation is not really as bullish
as it might appear at the first sight.

Let's begin this week's analysis by taking a look at the recent readings from
our correlation matrix.

The correlation matrix shows that the short-term coefficients are not as significant
as in weeks past. There appears to be a slight negative correlation between
metals and stocks but this does not hold true for silver.

It seems that the medium-term coefficients (90-day and 250-day columns) are
of more value at this time. Recent breakdowns have been seen in many of the
markets this week but in most cases have not yet been verified. The situation
is such that if these breakdowns are verified in the days ahead, the impact
will likely be felt for weeks and therefore the medium-term columns will provide
valuable insight.

Only the general stock market appears to have a significant influence on
the precious metals for this time-frame. Therefore, if stocks decline
from here, the same will likely be seen across the precious metals sector
for they will be dragged down as well by the declining stock prices. Although
the relationship is not clearly seen on a day-to-day basis (short-term correlation
is weak), a bigger move in stocks is still likely to have influence one
the precious metals sector.

Consequently, the most important influence upon precious metals this week
seems to be the general stock market and the outlook for stocks appears bearish.
An additional indirect influence comes from the USD Index and the sentiment
here is bearish as well.

Because of its multiple industrial uses, any serious weakness in the main
stock indices is likely to affect silver more than gold (charts courtesy by http://stockcharts.com).

Still, for now, silver's long-term chart for silver shows price action similar
to that seen for gold. There has been a breakdown below the long-term support
level which has not yet been verified. This is a slightly bearish signal and,
if verified and seen in other precious metals markets, will likely result in
silver prices declining quickly as well. As we have often mentioned in past
updates, silver is the least predictable of the precious metals and often follows
the trends set by gold and mining stocks.

Today, it may also follow a quick decline in stocks, which we have yet to
see.

Moving on to the mining stocks, the breakdown below 2008 highs is clearly
visible on the XAU Index chart.

The XAU Index of gold and silver mining stocks saw a decline in excess of
10% since the beginning of the year. The previous increases have failed to
hold the breakout above the 2008 highs, and at this moment the price is below
this particular level. A move back to the 2008 highs will verify this recent
breakdown. If this does indeed happen (mining stocks fail to move quickly above
this level), further declines will be likely and perhaps a bet on lower mining
stock prices would be in order.

If the big decline does come to pass, the XAU Index levels will likely move
down close to 180 and nearly to the lower border of the rising trend channel.

Overall, if we see higher prices for mining stocks, which appears likely,
and this increase is stopped by the level of the 2008 highs, this would be
a strong indication that lower prices for the whole precious metals sector
could soon be realized.

Summing up, given the size of the potential move in the precious metals
market in either direction from here, one should focus on factors influencing
precious metals in the medium term - and at this point it is the general stock
market.

Meanwhile, we have just posted a special mid-week update with our next trade
and explanation of a change concerning the long-term investment. In
order to read it simply sign
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Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who
takes advantage of the emotionality on the markets, and invites you to do
the same.

His company, Sunshine Profits, publishes analytical software that anyone can
use in order to get an accurate and unbiased view on the current situation.

Recognizing that predicting market behavior with 100% accuracy is a problem
that may never be solved, PR has changed the world of trading and investing
by enabling individuals to get easy access to the level of analysis that
was once available only to institutions.

High quality and profitability of analytical tools available at www.SunshineProfits.com are
results of time, thorough research and testing on PR's own capital.

PR believes that the greatest potential is currently in the precious metals
sector. For that reason it is his main point of interest to help you make
the most of that potential.

As a CFA charterholder, Przemyslaw Radomski shares the highest standards for
professional excellence and ethics for the ultimate benefit of society.

Disclaimer: All essays, research and information found above represent
analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates
only. As such, it may prove wrong and be a subject to change without notice.
Opinions and analyses were based on data available to authors of respective
essays at the time of writing. Although the information provided above is
based on careful research and sources that are believed to be accurate, Przemyslaw
Radomski, CFA and his associates do not guarantee the accuracy or thoroughness
of the data or information reported. The opinions published above are neither
an offer nor a recommendation to purchase or sell any securities. Mr. Radomski
is not a Registered Securities Advisor. By reading Przemyslaw Radomski's,
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